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An Anatomy of Dividend Investing

Most of the investors look for highly secure way to invest their hard-earned money which will not only let them to save for their retirement but also supplement their income. No matter how much return you want to earn out of your investment portfolio, it is essential that you should understand the risk and return associated with your investments. Most of the people have very basic understanding of the way stock market work and they believe that all types of investing are same but it isn’t true. Divided investing is one of the exceptional investing strategies where investors mainly focus on companies which pay regular dividend and possess history of raising dividends on constant basis. Go through following guide to know about extraordinary challenges associated with dividend investing and what are the tactics to manage them –

Consider Payout Ratio

When you are considering dividend investing, it is extremely essential to do some comprehensive research on the history of company in which you are planning to invest your money. One of the vital things which you must consider is the payout ratio demonstrated by company to investors. Always remember that, though higher payout ratio sounds like you will be earning significant money, they can actually set your money at higher risk. The standard thumb rule tells that not to mess with the companies which have payout ratio of more than 65%.

Capability of Company

One more thing worth looking is since how long a company has been offering dividend payment to investors. Is it a new company which has been demonstrating profit since last 2 years or is it a well established company with lot of satisfied shareholders? If you are investing in a company which is fairly young and wants to pay dividends to investors then it makes sense to ask important question whether it will able to sustain the dividend payout.

Dividend Growth is a Heart of a matter

As with human heart rate, inconsistency can be a big sign of problem, the same holds true when investing in selected dividend stocks. The consistency in growth of dividend is a key point to consider. Though significant amount of percentage increase in recent years is great, it is very important that the dividend percentage has been increasing by some consistent amount every year. As a thumb rule, you can opt for companies which have 5 to 7 year average of increasing their dividend by 6 to 10 percentage. You can think it in the way that each year company gives you consistent amount of pay raise. In current market scenario, you will find yourself lucky to avail raise of 5-6% from a well performing company.

Don’t fall in love with your stocks

If things don’t work out in your personal relationship then breaking up is hard thing to do but it normally turns out as a perfect decision in long term. The same scenario holds true in owning a stock of particular company.  It is fine to like your stocks, but don’t ever fall in love with any of those. Money combined with emotions can’t break your heart but it will definitely break your wallet. So make yourself aware of the signs when market scenario keeps changing. Most of the times, market provides you an opportunity to book your profits earlier than you have anticipated. It is not advisable to do short term trading, but if your stock has appreciated substantially in very short period then it definitely makes sense to book your profits in prior time.

Selecting high dividend paying companies

The best dividend investing is rarely about the biggest payout and highest yields but it is about highly safe and consistent payout. The best strategy of dividend investing is not to get tempted by high yield. Dividend is nothing but a portion of a firm’s earning offered to you in cash form and it is mainly based on sustainability and reality, and not on falling fundamentals. Your approach to stock selection should be as serious as you are purchasing an actual business. So don’t invest in companies which are fundamentally doubtful and don’t possess capability to provide high dividend yields.

Have a decent level of patience

The important element of using dividend to build significant cash flow and accumulate powerful wealth is to have enough patience. Give your investments sufficient time to grow as most of the lucrative investments tend to be long term investment. You should definitely monitor your investments from time to time but if you have done your all homework properly, the best strategy will be to sit back and wait.

Consider market volatility

If your objective is to build a significant stream of income then give higher importance to dividend payment history of company instead of its share price history. When you give emphasis on dividend payment instead of share price of company then you are more likely to earn consistent returns even during market downturn.

Identify the trend of dividend payment

Make proper analysis of how often your stock pays dividends. Semi-annual and Quarterly dividends are very common. The frequency and trend of dividend payment becomes critical issue when you require regular income. Sometimes, you may have to arrange your budget considering the period of your stock dividend payments.

Conclusion

Dividend investing is one of the greatest ways to earn passive income from companies which distribute their retain earnings among shareholders. Dividends not only provide you constant source of income but they provide long term stability to your investments. If an individual select fundamentally strong companies then dividend investing along with dividend reinvestment is a key formula for long term financial success. Above discussed anatomical applications to dividend investing will definitely help you to make proper diagnosis when designing your portfolio. Weighing the advantages of dividend investing against the drawbacks, it is fantastic strategy to generate some passive income by investing your money in high quality companies.  But the real key lies in having proper strategies, discipline and planning to capitalize on it.

 





One response to “An Anatomy of Dividend Investing”

  1. […] Hello Suckers gives us his list guidelines for picking great dividend stocks. […]

  2. John says:

    Hopefully one day I will be able to enjoy my dividends by spending them. As for now I am in a learning and savings mode. Even at the age of 54 there is more to learn.

    Best,

    John

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